Tax calculation on compensation received for agricultural land

This query is related to land acquired by Bihar government from my father 25-30 years back to create a colony for refuge who had come from Burma country. Thus was agriculture land and it doesn't come any municipal area. The compensation was paid at that time; however my father and other affected parties had filed the case in the lower court arguing that compensation was not adequate as it was very fertile land. After many years of legal battle the district court gave verdict in our favour and asked the state government to pay 50 lac as compensation. This was challenged by state government in Patna High court. The high court accepted the petition, but asked the state government to pay the compensation as directed by lower court. The matter is still pending in high court but state government paid 50 lac to my father as per high court order on adhoc basis. My father deposited this amount in fixed deposit. The bank is deducting TDS on this FD every year; however my father is not showing this as his income while filing income tax return thinking that he is not the real owner of money. Tomorrow if Patna high court gives decision which goes against him, he will have to return back the money with interest. My question is, from taxation point of view , what is the best way to deal it?

Asked 1 year ago in Income Tax from Saharsa, Bihar

An interesting question!
The amount deposited as FD with the bank - whose money is that? Your father should have normally executed a bond to repay the money in case the High Court decides the case against him. Scrutiny of the Court order and the documents executed are necessary to determine whether the amount paid by the State Government is his income or liability. As there may not be deduction of tax at source at the time of making the payment by the State Government and further as the income is not taxable, it will be difficult to ascertain the nature of payment by the State Government. Apparently, the State Government did not deposit the compensation amount with the High Court. Hence, based upon the facts as stated by you and subject to the scrutiny of the High Court order and the documents executed by your father, I feel that the amount received was in the nature of income to your father and the future liability is in the nature of a contingent liability.
The income earned on the FD with the bank is taxable in the hands of your father. If your father has to refund the deposit amount along with interest in case he loses his case in the High Court, he can then perhaps seek review of assessment by the Commissioner of Income Tax u/s 264 of the Income Tax Act, if not barred by limitation.

My Prima facie observations are as below :-
The fact that 50 Lakhs has been received and the same is deposited by the assessee in a Fixed Deposit in Bank itself is sufficient for taxability of the Income accrued on the deposit.The fact that the amount is contingent in nature does not relieve the assessee from the taxability of the same. In view of the above, i am of the opinion that the Interest earned/accrued on the Fixed Deposit has to be shown as Income of the assessee and the same has to be offered for taxation.
You can consider the following :-
1) Provide Form 15G/H as applicable to the bankers for non deduction of TDS in case the assessee's income is below taxable limits and offer the Interest on FD as income, where no tax shall be payable.
2) If the court orders for return of money along with interest, the same shall be adjusted against the capital gains as Expenses incurred for transfer so that the interest paid is duly compensated.

In my view, Capital Gain on Compulsory Acquisition of Agricultural land is exempt u/s 10(37) of the Income Tax Act, 1961. But the Agricultural land must have been used for Agriculture purpose for the preceding to previous years from the year of compulsory acquisition by the Assessee or his parents.
In your query you said that the land is acquired 25-30 years back. It is not clear as to which year does it pertains.
Another query was that your father has deposited the amount in FD and he is receiving interest and TDS has been deducted.
In my view your father has to declare this income (interest), claim TDS by filing Income Tax Returns regularly. You cannot deny filing income tax return stating that he is not real owner of money.

Dear Sir,
To cut long things short it is advisable for you to start filing your Income Tax Returns by declaring the Bank FD Interest Income & Claiming the TDS.
Non filing the Income Tax Returns may prove to be brutalin the long run as your Income details are being passed on to the Income Tax Department as soon as the TDS is deducted and paid in your name by the Bank.
Regards,
CA Rohit R Sharma
www.raskassociates.com

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